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**UNITEDSTATES********SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934.** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended March 31, 2009.**

** **

**OR**

 
| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |
|-------|------------|-------------------------------------------------------------------------------------------------|

 

**For the transition period from                         to                         **

 

**Commission File Number: 1-11388**

 

**PLCSYSTEMS INC.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Yukon Territory, Canada**                                      | ** ** | **04-3153858**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |
| * *                                                         | * *   | * *                              |
| **10 Forge Park, Franklin, Massachusetts**                       | ** ** | **02038**                             |
| (Address of  Principal Executive Offices)                        |       | (Zip Code)                            |

 

Registrant’s telephone number, including area code: **(508) 541-8800**

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes x No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).   Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer o                 |   | Accelerated filer o         |
|------------------------------------------------|--------|----------------------------------|
|                                           |   |                             |
| Non-accelerated filer o                   |   | Smaller reporting company x |
| (Do not check if a smaller  reporting company) |   |                             |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act)   Yes o No x

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

| **Class**                  | ** ** | **Outstanding  at May 8, 2009** |
|----------------------------|------------|--------------------------------------|
| Common Stock, no par value |       | 30,351,092                           |

 

 

 

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**PLC SYSTEMSINC.**

**Index**

 
| Part I.  | Financial Information: |                                                                                        |
|---------------|------------------------|---------------------------------------------------------------------------------------------|
|          |                   |                                                                                        |   |
|          | Item 1.                | Financial Statements                                                                        |   |
|          |                   |                                                                                        |   |
|          |                   | Condensed Consolidated  Balance Sheets (unaudited)                                          | 3 |
|          |                   |                                                                                        |   |
|          |                   | Condensed Consolidated  Statements of Operations (unaudited)                                | 4 |
|          |                   |                                                                                        |   |
|          |                   | Condensed Consolidated  Statements of Cash Flows (unaudited)                                | 5 |
|          |                   |                                                                                        |   |
|          |                   | Notes to Condensed Consolidated Financial Statements  (unaudited)                           | 6 |
|          |                   |                                                                                        |   |
|          | Item 2.                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12 |
|          |                   |                                                                                        |   |
|          | Item 3.                | Quantitative  and Qualitative Disclosures about Market Risk                                 | 20 |
|          |                   |                                                                                        |   |
|          | Item 4T.               | Controls and Procedures                                                                     | 20 |
|          |                   |                                                                                        |   |
| Part II. | Other Information:     |                                                                                        |
|          |                   |                                                                                        |   |
|          | Item 1A.               | Risk Factors                                                                                | 21 |
|          |                   |                                                                                        |   |
|          | Item 6.                | Exhibits                                                                                    | 21 |

 

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**Part I.     FinancialInformation**

 

**Item 1.    Financial Statements**

 

**PLCSYSTEMS INC.**

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                                | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                |
| Current assets:                                                                                                                                           |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                |       | $                        | 4,319      |                        | $          | 5,026 |   |
| Accounts  receivable, net of allowance of $21 and $20 at March 31, 2009 and  December 31, 2008, respectively                                    |       | 534                      |       | 802                         |       |
| Inventories, net                                                                                                                                          |       | 1,030                    |       | 1,136                       |       |
| Prepaid expenses  and other current assets                                                                                                                |       | 531                      |       | 598                         |       |
| Total current  assets                                                                                                                                     |       | 6,414                    |       | 7,562                       |       |
| Equipment,  furniture and leasehold improvements, net                                                                                                     |       | 134                      |       | 160                         |       |
| Other assets                                                                                                                                              |       | 190                      |       | 191                         |       |
| Total assets                                                                                                                                              |       | $                        | 6,738      |                        | $          | 7,913 |   |
| ** **                                                                                                                                                |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                             |
| Current  liabilities:                                                                                                                                     |       |                     |       |                        |       |
| Accounts payable                                                                                                                                          |       | $                        | 177        |                        | $          | 296 |   |
| Accrued  compensation                                                                                                                                     |       | 465                      |       | 525                         |       |
| Accrued other                                                                                                                                             |       | 174                      |       | 138                         |       |
| Deferred revenue                                                                                                                                          |       | 1,961                    |       | 2,405                       |       |
| Total current  liabilities                                                                                                                                |       | 2,777                    |       | 3,364                       |       |
| Deferred revenue                                                                                                                                          |       | 1,085                    |       | 1,358                       |       |
| Commitments and  contingencies                                                                                                                            |       |                     |       |                        |       |
| Stockholders’  equity:                                                                                                                               |       |                     |       |                        |       |
| Preferred stock,  no par value, unlimited shares authorized, none issued and outstanding                                                                  |       | —                   |       | —                      |       |
| Common stock, no  par value, unlimited shares authorized, 30,351 shares issued and outstanding  as of both March 31, 2009 and December 31, 2008 |       | 93,893                   |       | 93,893                      |       |
| Additional paid  in capital                                                                                                                               |       | 528                      |       | 474                         |       |
| Accumulated  deficit                                                                                                                                      |       | (91,196                  | )          | (90,838                     | )          |
| Accumulated  other comprehensive loss                                                                                                                     |       | (349                     | )          | (338                        | )          |
| Total  stockholders’ equity                                                                                                                          |       | 2,876                    |       | 3,191                       |       |
| Total  liabilities and stockholders’ equity                                                                                                          |       | $                        | 6,738      |                        | $          | 7,913 |   |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

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**PLCSYSTEMS INC.**

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands,except per share data)

(Unaudited)

 
| ** **                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Revenues:                             |       |                                   |       |   |   |
| Product sales                         |       | $                                      | 1,259      |   | $ | 806 |   |
| Service fees                          |       | 308                                    |       | 362 |   |
| Total revenues                        |       | 1,567                                  |       | 1,168 |   |
|                                  |       |                                   |       |   |   |
| Cost of  revenues:                    |       |                                   |       |   |   |
| Product sales                         |       | 411                                    |       | 220 |   |
| Service fees                          |       | 201                                    |       | 185 |   |
| Total cost of  revenues               |       | 612                                    |       | 405 |   |
| Gross profit                          |       | 955                                    |       | 763 |   |
|                                  |       |                                   |       |   |   |
| Operating  expenses:                  |       |                                   |       |   |   |
| Selling, general  and administrative  |       | 1,085                                  |       | 970 |   |
| Research and  development             |       | 229                                    |       | 608 |   |
| Total operating  expenses             |       | 1,314                                  |       | 1,578 |   |
| Loss from  operations                 |       | (359                                   | )          | (815 | ) |
| Other income,  net                    |       | 1                                      |       | 53 |   |
| Net loss                              |       | $                                      | (358       | ) | $ | (762 | ) |
| Basic and  diluted loss per share     |       | $                                      | (0.01      | ) | $ | (0.03 | ) |
| Weighted average  shares outstanding: |       |                                   |       |   |   |
| Basic and  diluted                    |       | 30,351                                 |       | 30,329 |   |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

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**PLC SYSTEMS INC.**

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 
| ** **                                                                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| Operating activities:                                                                       |       |                                   |       |   |   |
| Net loss                                                                                    |       | $                                      | (358       | ) | $ | (762 | ) |
|                                                                                        |       |                                   |       |   |   |
| Adjustments to  reconcile net loss to net cash provided by (used for) operating activities: |       |                                   |       |   |   |
| Depreciation and  amortization                                                              |       | 27                                     |       | 25 |   |
| Compensation  expense from stock options                                                    |       | 54                                     |       | 49 |   |
| Change in assets  and liabilities:                                                          |       |                                   |       |   |   |
| Accounts  receivable                                                                        |       | 270                                    |       | 302 |   |
| Inventory                                                                                   |       | 107                                    |       | (581 | ) |
| Prepaid expenses  and other assets                                                          |       | 67                                     |       | (37 | ) |
| Accounts payable                                                                            |       | (119                                   | )          | 58 |   |
| Deferred revenue                                                                            |       | (716                                   | )          | (159 | ) |
| Accrued  liabilities                                                                        |       | (24                                    | )          | (100 | ) |
| Net cash used  for operating activities                                                     |       | (692                                   | )          | (1,205 | ) |
|                                                                                        |       |                                   |       |   |   |
| Investing  activities:                                                                      |       |                                   |       |   |   |
| Purchase of  equipment                                                                      |       | —                                 |       | (27 | ) |
| Net cash used  for investing activities                                                     |       | —                                 |       | (27 | ) |
|                                                                                        |       |                                   |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                               |       | (15                                    | )          | 12 |   |
| Net decrease in  cash and cash equivalents                                                  |       | (707                                   | )          | (1,220 | ) |
| Cash and cash  equivalents at beginning of period                                           |       | 5,026                                  |       | 8,060 |   |
| Cash and cash  equivalents at end of period                                                 |       | $                                      | 4,319      |   | $ | 6,840 |   |

 

The accompanying notes are an integral part of the condensedconsolidated financial statements.

 

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**PLCSYSTEMS INC.**

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31,2009

 

***1.******                                     ******Business***

 

PLC Systems Inc. (“PLC” or the “Company”) is amedical device company specializing in innovative technologies for the cardiacand vascular markets.  The Companypioneered and manufactures the *CO**2** Heart Laser System* (the “Heart Laser System”) that cardiacsurgeons use to perform carbon dioxide (CO2) transmyocardial revascularization, orTMR, to alleviate symptoms of severe angina. The Company also manufactures CO2 surgical laser tubes and provides contractassembly services on general purpose CO2**lasers,which it sells to a single customer on an original equipment manufacturer (“OEM”)basis.

 

On March 20, 2007, the Company entered intoa distribution agreement with Novadaq Corp. (“Novadaq”), a subsidiary ofNovadaq Technologies Inc., pursuant to which the Company appointed Novadaq asits exclusive distributor in the United States for its TMR business.  The agreement amended and restated theexclusive distribution agreement between the Company and Edwards LifesciencesLLC (“Edwards”), which had been assigned by Edwards to Novadaq on the samedate.  The agreement with Novadaqreflects substantially the same roles, responsibilities and financial terms asthe previous agreement with Edwards.

 

In addition, the Company has begun initialcommercialization in the European Union (“EU”) of its newest product,RenalGuard®. RenalGuard is designed to reduce thepotentially toxic effects that contrast media can have on the kidneys when itis administered to patients during certain medical imaging procedures. It isbelieved that allowing contrast media to dwell in the kidneys can lead tocontrast-induced nephropathy (“CIN”), a potentially deadly form of acute kidneyinjury. By inducing and maintaining a high urine flow rate before, during andafter these medical imaging procedures, the Company believes the incidencerates of CIN in at-risk patients can be reduced. RenalGuard facilitates thisincreased urine clearance, enabling the body to more rapidly void the contrastmedia, thereby reducing its overall resident time and toxic effects in thekidney.

 

The Company has received full U.S. Food and DrugAdministration (“FDA”) approval to conduct a pivotal human clinical trial ofRenalGuard evaluating its safety and effectiveness in preventing CIN.  This trial is required to support apre-market approval application which must be approved by the FDA before theCompany can market RenalGuard in the U.S. The Company does not intend tocommence this pivotal study until it is able to secure sufficient additionalcapital to complete the study.

 

The Company is also supporting aninvestigator-sponsored randomized controlled trial utilizing RenalGuard that isbeing conducted at the Centro Cardiologico Monzino-University of Milan (“CCM”)in Milan, Italy. The CCM trial is designed to determine the effectiveness ofRenalGuard in preventing CIN in at-risk patients.  The Company hopes that the data from the CCMclinical trial will enable it to raise the additional capital necessary to bothstart and complete the U.S. pivotal study.

 

RenalGuard is currently approved for sale in theEU as a general fluid balancing device. The RenalGuard SystemTM consists of a proprietary, closed loop,software-controlled console 

 

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and accompanying single-use sets that can beused by physicians and nurses to manage patient fluid levels.  RenalGuard operates by first collecting andmeasuring patient urine outputs and then, in real-time, precisely matchingthose urine outputs with a prescribed replacement fluid by means of intravenousinfusion.  With its automated matchedfluid replacement capability, RenalGuard is intended to minimize the risk topatients of over- or under-hydration while also eliminating to a large degreewhat can otherwise be an intensive and time consuming manual fluid balancingtask for physicians and nurses.

 

The Company is establishing adistribution network in the EU with the intent to market RenalGuard for generalfluid balancing applications.

 

***2.******                                     ******Basis of Presentation***

 

The accompanyingunaudited condensed consolidated financial statements of the Company have beenprepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q and Article 10of Regulation S-X.  Accordingly, they donot include all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring adjustments) considered necessary for a fairpresentation have been included. Operating results for the three months ended March 31, 2009 are notnecessarily indicative of the results that may be expected for the year ending December 31,2009.  These financial statements shouldbe read in conjunction with the consolidated financial statements and footnotesthereto included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2008.

 

The preparation of financial statements in accordance with generallyaccepted accounting principles requires the Company to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

***3.******                                     ******Inventories***

 

Inventoriesare stated at the lower of cost (computed on a first-in, first-out method) ormarket value and include allocations of labor and overhead.  As of March 31, 2009 and December 31,2008, inventories consisted of the following (in thousands):

 
| ** **       | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials    |       | $                        | 403        |                        | $          | 573 |   |
| Work in progress |       | 102                      |       | 154                         |       |
| Finished goods   |       | 525                      |       | 409                         |       |
|             |       | $                        | 1,030      |                        | $          | 1,136 |   |

 

At March 31,2009 and December 31, 2008, inventories are stated net of a specificobsolescence allowance of $800,000 and $808,000, respectively.

 

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***4.******                                     ******Stock-BasedCompensation***

 

*StockOption Plans*

 

In May 2005, the Company’s shareholdersapproved the 2005 Stock Incentive Plan (the “2005 Plan”).  The 2005 Plan has replaced the 1997 ExecutiveStock Option Plan, 2000 Equity Incentive Plan, 2000 Non-Statutory Stock OptionPlan and 2000 Non-Qualified Performance and Retention Equity Plan(collectively, the “Previous Plans”), under which no further awards can begranted.

 

On June 18, 2008, the Company’s shareholders approved an amendmentincreasing the number of shares of common stock authorized for issuance underthe 2005 Plan by an additional 2,000,000 shares.  The number of stock options that may begranted under the 2005 Plan is now equal to 4,156,175 shares of common stock(subject to adjustment in the event of stock splits and other similar events),plus such number of shares as may become available under the Previous Plansafter the date of the adoption of the 2005 Plan, which may not exceed 2,535,492additional shares.  Incentive stockoptions are issuable only to employees of the Company, while non-qualifiedstock options may be issued to non-employee directors, consultants and others,as well as to employees. The options granted under the Previous Plans and the2005 Plan become exercisable either immediately upon grant, or ratably over oneto four years from the date of grant, and expire ten years from the date ofgrant.  Under the 2005 Plan, the pershare exercise price of incentive stock options may not be less than the fairmarket value of the common stock on the date the option is granted.  The 2005 Plan provides that the Company maynot grant non-qualified stock options at an exercise price less than 85% of thefair market value of the Company’s common stock.

 

The Company grants stock options to its non-employee directors.Generally, new non-employee directors receive an initial grant of an option topurchase 30,000 shares of the Company’s common stock that vests in installmentsover three years.  Once the initial granthas fully vested, non-employee directors (other than the Chairman of the Board)receive an annual grant of an option to purchase 15,000 shares of the Company’scommon stock that generally vests in four equal quarterly installments. TheChairman of the Board receives an annual grant of an option to purchase 30,000shares of the Company’s common stock that generally vests in four equalquarterly installments. All such options have an exercise price equal to thefair market value of the Company’s common stock on the date of grant.

 

Options granted during 2008 vest ratably annually over a three yearperiod for employees and ratably quarterly over a one year period fornon-employee directors.  There were nostock options granted during the three months ended March 31, 2009.

 

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The following is a summary of option activity under all plans(in thousands, except per option data):

 
| ** **                           | ** ** | **Number  of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Average  Remaining  Contractual  Life (Years)** | ** ** |
|--------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|--------------------------------------------------------|------------|
| Outstanding,  December 31, 2008 |       | 5,499                   |       | $                                      | 0.69       |                                                   | 5.43       |   |
| Granted                              |       | —                  |       | —                                 |       |                                                   |       |
| Exercised                            |       | —                  |       | —                                 |       |                                                   |       |
| Forfeited                            |       | (88                     | )          | 0.53                                   |       |                                                   |       |
| Expired                              |       | (35                     | )          | 3.29                                   |       |                                                   |       |
| Outstanding,  March 31, 2009    |       | 5,376                   |       | $                                      | 0.70       |                                                   | 5.30       |   |
| Exercisable,  March 31, 2009    |       | 4,525                   |       | $                                      | 0.70       |                                                   | 4.53       |   |

 

The following table summarizes unvested optionactivity during the three months ended March 31, 2009:

 
| ** **                        | ** ** | **Number  of  Options**                                                   | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                        | ** ** | **(In thousands, except weighted average data)** | ** ** |
| ** **                        | ** ** | ** **                                                                | ** ** |
| Unvested,  December 31, 2008 |       | 968                                                                       |       | $                                                       | 0.35       |   |
| Granted                           |       | —                                                                    |       | —                                                  |       |
| Vested                            |       | (29                                                                       | )          | 0.28                                                    |       |
| Forfeited                         |       | (88                                                                       | )          | 0.36                                                    |       |
| Unvested,  March 31, 2009    |       | 851                                                                       |       | 0.36                                                    |       |
|                                   |            |                                                                           |            |                                                         |            |  |

 

*SFAS No. 123(R)*

 

The Company records stock based compensation pursuant to Statement ofFinancial Accounting Standards No. 123 (revised 2004), “Share-basedPayment”.  The Company recordedcompensation expense of $54,000 and $49,000 in the three months ended March 31,2009 and 2008, respectively.  As of March 31,2009, the Company had $182,000 of total unrecognized compensation cost relatedto its unvested options, which is expected to be recognized over a weightedaverage period of 1.2 years.

 

Therewere no options granted in the three months ended March 31, 2009 or 2008.

 

The expected life was calculated in 2008 using the simplified method. Therisk-free interest rate is based on the U.S. Treasury yield curve in effect atthe time of the grant for the expected term period.  Expected volatility is based exclusively onhistorical volatility data of the Company’s common stock.  The Company estimates an expected forfeiturerate based on its historical forfeiture activity.  Actual results, and future changes inestimates, may differ substantially from the Company’s current estimates.

 

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*Stock Purchase Plan*

 

TheCompany has a 2000 Employee Stock Purchase Plan (the “Purchase Plan”) for alleligible employees whereby shares of the Company’s common stock may bepurchased at six-month intervals at 95% of the average of the closing bid andask prices of the Company’s common stock on the over-the-counter market on thelast business day of the relevant plan period. Employees may purchase shares having a value not exceeding 10% of theirgross compensation during an offering period, subject to certain additionallimitations.  Under the Purchase Plan,employees of the Company purchased 21,612 shares of common stock in 2008 at anaverage price of $0.08 per share.  Therewas no purchase activity in the three months ended March 31, 2009.  At March 31, 2009, 294,461 shares werereserved for future issuance under the Purchase Plan.

 

***5.******                                     ******Revenue Recognition***

 

TheCompany records revenue from the sale of TMR kits at the time of shipment toNovadaq.  TMR kit revenues include theamount invoiced to Novadaq for kits shipped pursuant to purchase ordersreceived, as well as an amortized portion of deferred revenue related to apayment of $4,533,333 from Edwards, the Company’s previous exclusive U.S. TMRdistributor, received in February 2004. This payment was made in exchange for a reduction in the prospectivepurchase price the Company receives upon a sale of the kits.  The Company is amortizing this payment intoits Consolidated Statements of Operations as revenue over a seven year period(culminating in 2010) under the units-of-revenue method as prescribed byEmerging Issues Task Force 88-18, “Sales of Future Revenue”.  The Company determined that a seven yeartimeframe was the most appropriate amortization period based on a valuationmodel it used to assess the economic fairness of the payment. Factors theCompany considered in developing this valuation model included the estimatedforegone revenues over a seven year period resulting from the reduction in theprospective purchase price payable to the Company, a discount rate deemedappropriate to this transaction and an estimate of the remaining economicuseful life of the current TMR kit design, without any benefit being given topotential future product improvements the Company may make.  The Company reviews annually, and adjusts ifnecessary, the prospective revenue amortization rate for kits based on its bestestimate of the total number of kits likely remaining to be shipped to hospitalcustomers by Novadaq through 2010. The Company recorded amortization of$269,000 and $180,000 in the three months ended March 31, 2009 and 2008,respectively, which is included in revenues in the Consolidated Statements ofOperations.

 

TMRlasers are billed to Novadaq in accordance with purchase orders that theCompany receives.  Invoiced TMR lasersare recorded as other current assets and deferred revenue on the Company’sConsolidated Balance Sheet until such time as the laser is shipped to ahospital, at which time the Company records revenue and cost of revenue.

 

Underthe terms of the Novadaq TMR distribution agreement, once Novadaq has recovereda prescribed amount of revenue from a hospital for the use or purchase of a TMRlaser, any additional revenues earned by Novadaq are shared with the Companypursuant to a formula established in the distribution agreement. The Companyonly records its share of such additional revenue, if any, at the time therevenue is earned.

 

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The Company records all other product revenue,including sales of TMR lasers and kits to international customers, sales ofRenalGuard consoles and single-use sets and OEM sales of surgical tubes andgeneral purpose CO2 lasers, at the time of shipment.

 

Revenues from service and maintenance contracts arerecognized ratably over the life of the contract.

 

Installation revenues related to a TMR laser transactionare recorded as a component of service fees when the laser is installed.

 

***6.******                                     ******Loss per Share***

 

Inthe three months ended March 31, 2009 and 2008, basic and diluted loss pershare have been computed using only the weighted average number of commonshares outstanding during the period without giving effect to any potentialfuture issuances of common stock related to stock option programs, since theirinclusion would be antidilutive.

 

Forthe three months ended March 31, 2009 and 2008, 5,376,000 and 5,298,000shares, respectively, attributable to outstanding stock options were excludedfrom the calculation of diluted earnings per share because the effect wouldhave been antidilutive.  The followingtable sets forth the computation of basic and diluted loss per share:

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                 |       |                                             |       |   |   |
| Basic and  diluted:                  |       |                                             |       |   |   |
| Net loss                             |       | $                                                | (358       | ) | $ | (762 | ) |
| Weighted average  shares outstanding |       | 30,351                                           |       | 30,329 |   |
| Basic and  diluted loss per share    |       | $                                                | (0.01      | ) | $ | (0.03 | ) |

 

***7.******                                     ******Comprehensive Loss***

 

Totalcomprehensive loss for the three months ended March 31, 2009 and 2008amounted to $368,000 and $758,000, respectively.  Comprehensive loss is comprised of net lossplus the increase/decrease in currency translation adjustment.

 

# ***8.****                                     **Warrantyand Preventative Maintenance Costs*

# ** **

TheCompany warranties its products against manufacturing defects under normal useand service during the warranty period. The Company obtains similar warranties from a majority of its suppliers,including those who supply critical Heart Laser System components.  In addition, under the terms of its TMRdistribution agreement with Novadaq, the Company is able to bill Novadaq foractual warranty costs, including preventative maintenance services, up to aspecified amount during the warranty period.

 

The Company evaluates theestimated future unrecoverable costs of warranty and preventative maintenanceservices for its installed base of lasers and RenalGuard consoles andsingle-use sets on a quarterly basis and adjusts its warranty reserveaccordingly.  The Company 

 

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considers all availableevidence, including historical experience and information obtained fromsupplier audits.

 

Changes in the warrantyaccrual were as follows (in thousands):

 
| ** **                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Balance,  beginning of period       |       | $                                                | 10         |   | $ | 60 |   |
| Change in  liability for warranties |       | 20                                               |       | — |   |
| Balance, end of  period             |       | $                                                | 30         |   | $ | 60 |   |

 

**Item 2.****                      ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

This quarterly report on Form 10-Qcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). Statements containingterms such as “believes”, “plans”, “expects”, “anticipates”, “intends”, “estimates”and similar expressions reflect uncertainty and are forward-looking statements.Forward-looking statements are based upon current plans and expectations andinvolve known and unknown important risks and uncertainties that could causeactual results to differ materially from those described in the forward-lookingstatements. Such important factors and uncertainties include, but are notlimited to:

 

·                  We expect to incursignificant net losses in future quarters, at least through 2010;

·                  We may be unable toraise needed capital to implement our business plan and/or continue ouroperations in the future;

·                  We may never be ableto commence our U.S. pivotal clinical trial to study RenalGuard to determine ifit is safe and effective in preventing CIN;

·                  We may never besuccessful in obtaining pre-market approval from the FDA to market RenalGuardin the U.S.;

·                  We may never besuccessful in establishing a broad distribution channel for RenalGuard in theEU, and any distribution channel we may establish may never generate sufficientsales for us to attain profitability;

·                  Our ability toeffectively market RenalGuard in the EU is largely dependent on obtaining favorableresults from an outside sponsored clinical trial of RenalGuard underway at theCentro Cardiologico Monzino — University of Milan (CCM); however, we have noassurance that the CCM trial will ever produce clinically significant ormeaningful results or that it will be completed in a timely fashion or at all;

·                  Our RenalGuard Systemhas only had limited testing in a clinical setting and we may need to modify itsubstantially in the future for it to be commercially acceptable;

·                  Any potential futuremodifications required to make RenalGuard commercially acceptable may result insubstantial additional costs and/or market introduction delays;

·                  We are currentlydependent on one principal product line, the Heart Laser System, and oneprincipal customer, Novadaq, to generate revenues for us; and

·                  We believe it is unlikelythat we will be able to grow our TMR revenues in the near term and weadditionally believe it is likely that over time our TMR revenues will decline,

 

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makingour future prospects highly dependent upon the successful commercialization ofRenalGuard.

 

# **Overview**

# ** **

On November 7, 2008, our commonstock was delisted from the NYSE Alternext Market (formerly the American StockExchange).  Our common stock is nowquoted on both the OTC Bulletin Board and the Pink Sheets under the symbol “PLCSF”.

 

We are a medical device companyspecializing in innovative technologies for the cardiac and vascularmarkets.  We pioneered and manufacturethe Heart Laser System that cardiac surgeons use to perform TMR to alleviatesymptoms of severe angina. We also manufacture CO2 surgical laser tubes and provide contractassembly services on general purpose CO2**lasers.

 

In addition, we have begun initialcommercialization in the EU of our newest product, RenalGuard. RenalGuard isdesigned to reduce the potentially toxic effects that contrast media can haveon the kidneys when it is administered to patients during certain medicalimaging procedures. It is believed that allowing contrast media to dwell in thekidneys can lead to CIN, a potentially deadly form of acute kidney injury. Byinducing and maintaining a high urine flow rate before, during and after thesemedical imaging procedures, we believe the incidence rates of CIN in at-riskpatients can be reduced. RenalGuard facilitates this increased urine clearance,enabling the body to more rapidly void the contrast media, thereby reducing itsoverall resident time and toxic effects in the kidney.

 

In the U.S., we received full FDA approval toconduct our first human clinical trial utilizing RenalGuard under aninvestigational device exemption (“IDE”). This pilot clinical trial wasdesigned to evaluate the safety of RenalGuard and its ability to accuratelymeasure and balance fluid inputs and outputs on patients undergoing acatheterization imaging procedure where contrast media would beadministered.  In February 2008, wesubmitted an IDE supplement to the FDA seeking approval to move from our pilotstudy to a pivotal clinical trial to study the safety and effectiveness ofRenalGuard in the prevention of CIN. In March 2008, the FDA granted usconditional approval to begin this pivotal study; however, in July 2008,we announced we were deferring commencement of this study until such time as wecould successfully raise additional capital necessary to complete the study. Wesubsequently received full approval from the FDA to commence our pivotal studyunder a trial design that would enroll 406 patients at up to 30 sites in theU.S.

 

We are also supporting an investigator-sponsoredrandomized controlled trial utilizing RenalGuard that is being conducted at theCCM in Milan, Italy; it is designed to determine the effectiveness ofRenalGuard in preventing CIN in at-risk patients. We hope that the data fromthe clinical trial in Italy will enable us to raise the additional capitalnecessary to both start and complete the U.S. pivotal study.

 

RenalGuard is currently approved for sale in theEU as a general fluid balancing device. The RenalGuard System consists of aproprietary, closed loop, software-controlled console and accompanyingsingle-use sets that can be used by physicians and nurses to manage patientfluid levels. RenalGuard operates by first collecting and measuring patienturine outputs and then, in real-time, precisely matching those urine outputswith a prescribed replacement fluid by means of intravenous infusion. With itsautomated matched fluid replacement capability, RenalGuard is 

 

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intended to minimize the risk to patients ofover- or under-hydration while also eliminating to a large degree what canotherwise be an intensive and time consuming manual fluid balancing task forphysicians and nurses.  We areestablishing a distribution network in the EU with the intent to marketRenalGuard for general fluid balancing applications.

 

OurU.S. distributor for the Heart Laser System (Novadaq currently and Edwardsprior to March 20, 2007) is our largest customer, accounting for 56% ofour total revenues in the three months ended March 31, 2009 and 74% in theyear ended December 31, 2008, respectively.  We expect a high level of sales concentrationto continue in the near future with Novadaq as our largest customer because itholds the exclusive U.S. distribution rights for our TMR products.

 

Approximately 75% of our revenues in the three months ended March 31,2009 and 85% in the year ended December 31, 2008 came from the sale andservice of TMR lasers and related disposable kits. We believe that the numberof opportunities for new TMR laser sales to U.S. hospital customers, andspecifically sales opportunities for our HL2 laser, will continue to be limitedin future quarters as a result of (1) a diminishing number of availablehospitals that have not already implemented a TMR program that are still likelyto do so in the future, and (2) continuing financial pressures thathospitals face, in particular for the funding of new capital equipmentpurchases, in light of both the current tight global credit markets and theongoing trend of cutbacks in both Medicare and private insurance reimbursementrates for a majority of medical procedures. In addition, we have seen a recentdownward trend in the price at which new TMR lasers are being sold in the U.S.market as competition for the remaining available customers increases. As such,we expect that our U.S. TMR revenues in future quarters will continue to bemostly dependent upon the sale of TMR kits and service revenues.

 

Our management reviews a number of key performance indicators to assistin determining how to allocate resources and run our day-to-day operations.Theseindicators include (1) actual prior quarterly sales trends, (2) projectedU.S. TMR laser and kit sales for the next four quarters, as provided by Novadaqin a rolling 12 month sales forecast, (3) projected future sales of OEMsurgical tubes and laser assembly services as well as RenalGuard consoles andsingle-use sets, (4) research and development progress as measured againstinternal project plan objectives, (5) budget to actual financialexpenditure results, (6) inventory levels (both our own and ourdistributors’), and (7) short term and long term projected cash flows ofthe business.

 

# **Critical Accounting Policies and Estimates**

# ** **

Our financial statements are based upon the application ofsignificant accounting policies, many of which require us to make significantestimates and assumptions (see Note 2 to the Consolidated FinancialStatements).  We believe that thefollowing are some of the more material judgment areas in the application ofour accounting policies that currently affect our financial condition andresults of operations.

 

# ***Inventories***

# ** **

Inventories are stated at the lower of cost (computed on a first-in,first-out method) or market value and include allocations of labor andoverhead.  A specific obsolescenceallowance is provided for slow moving, excess and obsolete inventory based onour best estimate of the net realizable value of inventory on hand taking intoconsideration factors such as (1) actual trailing 12 month sales, (2) expectedfuture product line demand, based in part upon sales forecast input

 

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received from Novadaq andour other customers, and (3) service part stocking levels which, inmanagement’s best judgment, are advisable to maintain in order to meetwarranty, service contract and time and material spare part demands.  Historically, we have found our reserves tobe adequate.

 

# ***Accounts Receivable***

# ** **

Accounts receivable isstated at the amount we expect to collect from the outstanding balances.  We continuously monitor collections fromcustomers, and we maintain a provision for estimated credit losses based uponhistorical experience and any specific customer collection issues that we haveidentified.  Historically, we have notexperienced significant losses related to our accounts receivable. Collateralis not generally required. If the financial condition of our customers were todeteriorate, resulting in an impairment of their ability to make payments,additional allowances might be required.

 

***Researchand Development***

 

Research and developmentcosts are expensed as incurred.

 

# ***Warranty and Preventative Maintenance Costs***

# ** **

We warranty our productsagainst manufacturing defects under normal use and service during the warrantyperiod.  We obtain similar warrantiesfrom a majority of our suppliers, including those who supply critical HeartLaser System components.  In addition,under the terms of our TMR distribution agreement with Novadaq, we are able tobill Novadaq for actual warranty costs, including preventative maintenanceservices, up to a specified amount during the warranty period.

 

We evaluate the estimatedfuture unrecoverable costs of warranty and preventative maintenance servicesfor our installed base of lasers and RenalGuard consoles and single-use sets ona quarterly basis and adjust our warranty reserve accordingly.  We consider all available evidence, includinghistorical experience and information obtained from supplier audits.

 

## ***Revenue Recognition***

## *** ***

We record revenue fromthe sale of TMR kits at the time of shipment to Novadaq.  TMR kit revenues include the amount invoicedto Novadaq for kits shipped pursuant to purchase orders received, as well as anamortized portion of deferred revenue related to a payment of $4,533,333 fromEdwards, our previous exclusive U.S. TMR distributor, received in February 2004.  This payment was made in exchange for areduction in the prospective purchase price we receive upon a sale of thekits.  We are amortizing this paymentinto our Consolidated Statements of Operations as revenue over a seven yearperiod (culminating in 2010) under the units-of-revenue method as prescribed byEmerging Issues Task Force 88-18, “Sales of Future Revenue”. We determined thata seven year timeframe was the most appropriate amortization period based on avaluation model we used to assess the economic fairness of the payment. Factorswe considered in developing this valuation model included the estimatedforegone revenues over a seven year period resulting from the reduction in theprospective purchase price payable to us, a discount rate deemed appropriate tothis transaction and an estimate of the remaining economic useful life of thecurrent TMR kit design, without any benefit being given to potential future

 

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product improvements wemay make. We review annually, and adjust if necessary, the prospective revenueamortization rate for kits based on our best estimate of the total number ofkits likely remaining to be shipped to hospital customers by Novadaq through2010. We recorded amortization of $269,000 and $180,000 in the three monthsended March 31, 2009 and 2008, respectively, which is included in revenuesin our Consolidated Statements of Operations.

 

TMR lasers are billed toNovadaq in accordance with purchase orders that we receive.  Invoiced TMR lasers are recorded as othercurrent assets and deferred revenue on our Consolidated Balance Sheet untilsuch time as the laser is shipped to a hospital, at which time we recordrevenue and cost of revenue.

 

Under the terms of theTMR distribution agreement, once Novadaq has recovered a prescribed amount ofrevenue from a hospital for the use or purchase of a TMR laser, any additionalrevenues earned by Novadaq are shared with us pursuant to a formula establishedin the distribution agreement. We only record our share of such additionalrevenue, if any, at the time the revenue is earned.

 

We record all otherproduct revenue, including sales of TMR lasers and kits to internationalcustomers, sales of RenalGuard consoles and single-use sets and OEM sales ofsurgical tubes and general purpose CO2 lasers,at the time of shipment.

 

Revenues from service and maintenance contracts arerecognized ratably over the life of the contract.

 

Installation revenues related to a TMR lasertransaction are recorded as a component of service fees when the laser isinstalled.

 

## ***Resultsof Operations***

## *** ***

Results for the three months ended March 31,2009 and 2008 and the related percent of revenues were as follows:

 
| ** **                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **                                 | ** ** | **$**                                  | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                 | ** ** | **(dollars in thousands)**             | ** ** |
| Total revenues                             |       | $                                      | 1,567      |   | 100 | % | $ | 1,168 |   | 100 | % |
| Total cost of revenues                     |       | 612                                    |       | 39 |   | 405 |   | 35 |   |
| Gross profit                               |       | 955                                    |       | 61 |   | 763 |   | 65 |   |
| Selling, general & administrative |       | 1,085                                  |       | 69 |   | 970 |   | 83 |   |
| Research & development            |       | 229                                    |       | 15 |   | 608 |   | 52 |   |
| Total operating expenses                   |       | 1,314                                  |       | 84 |   | 1,578 |   | 135 |   |
| Loss from operations                       |       | (359                                   | )          | (23 | ) | (815 | ) | (70 | ) |
| Other income                               |       | 1                                      |       | — |   | 53 |   | 5 |   |
| Net loss                                   |       | $                                      | (358       | ) | (23 | )% | $ | (762 | ) | (65 | )% |

 

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| ** **                                          | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase (decrease)** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **2009**                               | ** ** | **2008**                | ** ** | **over 2008** | ** ** |
| ** **                                          | ** ** | **$**                                  | ** ** | **$**                   | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                          | ** ** | **(dollars in thousands)**             | ** ** |
| Product sales                                       |       | $                                      | 1,259      |                    | $          | 806 |   | $ | 453 |   | 56 | % |
| Service fees                                        |       | 308                                    |       | 362                     |       | (54 | ) | (15 | ) |
| Total revenues                                      |       | 1,567                                  |       | 1,168                   |       | 399 |   | 34 |   |
| Product cost of sales                               |       | 411                                    |       | 220                     |       | 191 |   | 87 |   |
| Service fees cost of sales                          |       | 201                                    |       | 185                     |       | 16 |   | 9 |   |
| Total cost of revenues                              |       | 612                                    |       | 405                     |       | 207 |   | 51 |   |
| Gross profit                                        |       | 955                                    |       | 763                     |       | 192 |   | 25 |   |
| Selling, general & administrative expenses |       | 1,085                                  |       | 970                     |       | 115 |   | 12 |   |
| Research & development expenses            |       | 229                                    |       | 608                     |       | (379 | ) | (62 | ) |
| Total operating expenses                            |       | 1,314                                  |       | 1,578                   |       | (264 | ) | (17 | ) |
| Loss from operations                                |       | (359                                   | )          | (815                    | )          | 456 |   | 56 |   |
| Other income                                        |       | 1                                      |       | 53                      |       | (52 | ) | (98 | ) |
| Net loss                                            |       | $                                      | (358       | )                       | $          | (762 | ) | $ | 404 |   | 53 | % |

 

***Product Sales***

 

Disposable TMR kitrevenues, the largest component of product sales in the three months ended March 31,2009, increased by $67,000, or 12%, as compared to the three months ended March 31,2008.  Domestic TMR kit revenuesincreased $72,000 as a result of $89,000 in increased disposable revenueamortization and $18,000 attributable to an increase in the average sellingprice of TMR kits, offset by a $35,000 revenue decrease attributable to a lowervolume of TMR kits sold to Novadaq. International kit revenues decreased by $5,000 in the three months endedMarch 31, 2009 as compared to the three months ended March 31, 2008.

 

TMR laser revenuesincreased $120,000, or 95%, in the three months ended March 31, 2009 ascompared to the three months ended March 31, 2008. International TMR laserrevenues increased $220,000 due to the sale of one new Heart Laser System for$246,000, offset in part by a decrease in other international TMR laserrevenues of $26,000.  Domestic TMR laserrevenues decreased by $100,000 as a result of no new Heart Laser Systems beingshipped domestically this quarter.

 

Other product salesincreased $266,000, or 218%, in the three months ended March 31, 2009 ascompared to the three months ended March 31, 2008.  Internationalother product sales increased $302,000 as a result of the sale of certain thirdparty equipment we were required to supply along with the international HeartLaser System that we recorded as revenue in the first quarter of 2009. OEMmanufacturing contract assembly product revenues increased $35,000, whileinternational RenalGuard revenues decreased by $71,000.

 

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***Service Fee Revenues***

 

Service fees decreased$54,000, or 15%, in the three months ended March 31, 2009 as compared tothe three months ended March 31, 2008. Domestic service fees decreased$53,000 as a result of lower billable service calls, offset in part byincreased spare part sales and higher extended service contract revenues.International service fees decreased $1,000.

 

***Gross Profit***

 

Gross profit was$955,000, or 61% of total revenues, in the three months ended March 31,2009 as compared with gross profit of $763,000, or 65% of total revenues, inthe three months ended March 31, 2008. The increase in gross profitdollars is due to (1) the international sale of a Heart Laser System andother third party equipment as discussed above, (2) higher TMR disposablekit amortization and (3) an increase in the domestic average selling priceof TMR kits.  These increases were offsetin part by (1) the decrease in RenalGuard sales, (2) a decrease inservice fees, (3) a lower volume of TMR kits sold to Novadaq and (4) higherunabsorbed period overhead costs.

 

***Selling, General and Administrative Expenses***

 

Selling, general andadministrative expenditures increased 12% in the three months ended March 31,2009 as compared to the three months ended March 31, 2008. The increasewas due to higher sales expenses associated with the sale of the Heart LaserSystem and third party equipment we supplied during the first quarter of 2009,which together totaled $269,000.  Thisincrease was offset in part by lower compensation related costs.

 

***Research and Development Expenses***

 

Research and developmentexpenditures decreased 62% in the three months ended March 31, 2009 ascompared to the three months ended March 31, 2008. The decrease was due to(1) lower RenalGuard clinical trial costs resulting from the suspension ofthe U.S. pivotal study and (2) reduced RenalGuard product development expenditures.

 

***Other Income***

 

Other income decreased$52,000, or 98%, in the three months ended March 31, 2009 as compared tothe three months ended March 31, 2008.  This decrease is a result oflower interest income due to lower average investable balances and lowerinterest rates on those investable balances.

 

***Net Loss***

 

In the three months endedMarch 31, 2009, our net loss decreased $404,000, or 53%, due to (1) loweroperating expenses and (2) higher gross margin dollars, offset in part bylower interest income.

 

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***Kit Shipments***

 

We generally viewdisposable kit shipments to end users as an important metric in evaluating ourbusiness, although we believe that specific short-term factors not indicativeof long-term trends can sometimes affect shipments of disposable kits in anygiven quarter.  Domestic kit shipmentsreferenced in the table below relate to sales by Novadaq to hospital endusers.  International kit shipmentsrelate to sales by us directly to our international distributors or hospitalend users.

 

Disposable kit shipmentsto end users were as follows:

 
| ** **                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| ** **                     | ** ** | **2009**                               | ** ** | **2008** | ** ** | **%  Increase  (Decrease)  Over  2008** | ** ** |
| Domestic (by U.S. Distributor) |       | 332                                    |       | 375 |   | (11 | ) |
| International                  |       | 15                                     |       | 15 |   | — |   |
| Total                          |       | 347                                    |       | 390 |   | (11 | ) |

 

Because a significant number of the total TMRprocedures performed each year by cardiac surgeons are done in combination withopen-heart bypass surgery, we believe any future growth in the number of TMRprocedures will be partly dependent upon the number of bypass surgeriesperformed in the future, which we believe have the potential to grow modestlyover the next few years.

 

**Liquidityand Capital Resources**

 

Cash and cash equivalentstotaled $4,319,000 as of March 31, 2009, a decrease of $707,000 from$5,026,000 as of December 31, 2008. We have no debt obligations. We believe that our existing cash resourceswill meet our working capital requirements through at least the next 12 months.

 

Cash used for operatingactivities in the three months ended March 31, 2009 was $692,000 due toour net loss, partially offset by non-cash depreciation and amortization andcompensation related to stock options. The effect of exchange rate changes resulted in a $15,000 use of cash.

 

In the near term we do not expect that our TMR-relatedrevenues will change significantly. Therefore we will be largely dependent uponour ability to increase our revenues through the sale of our RenalGuard productinto international markets. Should sales of RenalGuard not increasesufficiently, our liquidity and capital resources will be negatively impacted.

 

Additionally, unanticipated decreases in operatingrevenues, increases in expenses or changes or delays in third-partyreimbursement to healthcare providers using our TMR products would adverselyimpact our cash position and require further cost reductions or the need toobtain additional capital.

 

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We believe if we have sufficient cash to continue ouroperations that we will incur losses at least through 2010.  In addition, we cannot be certain that wewill be able to raise the additional capital necessary to start and completethe pivotal clinical trial in the U.S. that is necessary to obtain regulatoryapproval to market RenalGuard in the U.S., or that future sales, if any, of RenalGuardwill justify these investments.  Therecan be no assurance that the future capital we will need to implement ourbusiness plan will be available on terms and conditions acceptable to us,especially considering the current uncertainty in the global creditmarkets.  Should additional financing notbe available on terms and conditions acceptable to us, or if we are unable tosufficiently increase sales of our products, we will need to further curtailour TMR and RenalGuard programs and take additional actions that will adverselyimpact our ability to continue to realize assets and satisfy liabilities in thenormal course of business.  Theconsolidated financial statements set forth in this report do not include anyadjustments to reflect the possible future effects of these uncertainties.

 

**Off-Balance Sheet Arrangements**

 

None.

 

**Item 3.        Quantitativeand Qualitative Disclosures about Market Risk**

 

Pursuant to Item 305(e) ofRegulation S-K, we are not required to provide this information because we area smaller reporting company.

 

## ***Item4T.     Controls and Procedures***

## *** ***

***Evaluation of Disclosure Controls and Procedures***

 

Our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the effectiveness of our disclosure controls and procedures as of March 31,2009.  The term “disclosure controls andprocedures”, as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act, means controls and other procedures of a company that aredesigned to ensure that information required to be disclosed by a company inthe reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by a company in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the company’smanagement, including its principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving their objectives and management necessarilyapplies its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.  Based upon theevaluation of our disclosure controls and procedures as of March 31, 2009,our chief executive officer and chief financial officer concluded that, as ofsuch date, our disclosure controls and procedures were effective at thereasonable assurance level.

 

***Changes in Internal Control overFinancial Reporting***

 

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) occurred during the fiscal quarter ended March 31, 2009 that

 

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hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**Part II.  Other Information**

 

**Item 1A.       RiskFactors**

 

Pursuant to theinstructions to Item 1A. of Form 10-Q, we are not required to provide thisinformation because we are a smaller reporting company.

 

**Item 6.          Exhibits**

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                                               |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                      |
| 31.1                |       | Certification of  Principal Executive Officer pursuant to Rule 13a-14(a) or  15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|                |       |                                                                                                                                                                                                                      |
| 31.2                |       | Certification of  Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of  the Securities Exchange Act of 1934, as adopted pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. |
|                |       |                                                                                                                                                                                                                      |
| 32.1                |       | Certifications pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                      |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                                      | PLC SYSTEMS INC. |
|-------------------------------------------|------------------|
|                                      |             |
| Date:   May 14,  2009 | By:              | /s/ James G. Thomasch |
|                                      |             | James G. Thomasch |
|                                      |             | Chief Financial Officer  (Principal Financial Officer and Chief Accounting Officer) |

 

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**EXHIBITINDEX**

 
| **Exhibit  Number** | ** ** | **Description of Document**                                                                                                                                                                                               |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                      |
| 31.1                |       | Certification of  Principal Executive Officer pursuant to Rule 13a-14(a) or  15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|                |       |                                                                                                                                                                                                                      |
| 31.2                |       | Certification of  Principal Financial Officer pursuant to Rule 13a-14(a) or  15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|                |       |                                                                                                                                                                                                                      |
| 32.1                |       | Certifications pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                      |

 

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